Investing

Why talk about a market downturn now? Why not?

The economy and markets are sending mixed signals

As my colleagues Josh Hirt, Alexis Gray, and Shaan Raithatha wrote recently, most major economies remain in the throes of the COVID-19 pandemic, and Vanguard expects fiscal and monetary policy to remain supportive in the months ahead. But eventually, in a still-distant future, the unwinding of support as COVID-19 is addressed and economic activity correspondingly picks up will have implications for economic fundamentals and financial markets.

Central banks have signaled their intentions to keep interest rates low well beyond 2021, but forward-looking markets will eventually price in rate hikes. This means the low rates that have helped support higher equity valuations will eventually start to rise again. Somewhat higher inflation at some point is also a risk that we’ve been discussing and that we outlined in the Vanguard Economic and Market Outlook for 2021: Approaching the Dawn.

As we also noted in our annual outlook, equity indexes in many developed markets appeared to be valued fairly but toward the upper end of our estimates of fair value. To that end, the Standard & Poor’s 500 Index finished 2020 at a record high and has done so six more times already in 2021.

Volatility that has accompanied recent high-profile speculation in a handful of stocks and even commodities only adds to the uncertainty. (Vanguard’s chief investment officer, Greg Davis, wrote recently about how investors should respond when stocks get ahead of fundamentals.)

So let’s talk about the value of long-term investing

 

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